Alistair Berg

Buying stocks of companies that are going through major changes can be both incredibly rewarding and incredibly risky. Indeed, an enormous amount of uncertainty can cloud the fundamental picture of the companies in question. This makes it difficult for the market to determine whether or not the company in question is offering a nice upside. And these days, few companies are undergoing such a significant change as Take-Two interactive software (NASDAQ: TWO) is actually. On August 8, after the market closes, the company is due to release its financial performance covering the first quarter of its fiscal year 2023. While that in itself is nothing special, it is also true that on May 23, the company completed its merger with Zynga, essentially absorbing the company in a cash and stock transaction. What investors should therefore look forward to is a new quarter for the combined company. But that’s made even more complicated by the fact that Zynga will only have been part of the picture for less than half of a quarter. Add to that the fact that Take-Two Interactive Software is already restructuring its operations and probably find ways to cut costs, and there’s really no way of knowing what to expect when the company reports.

Take-Two Interactive – Keep It Simple

As you can already see, the data reported by Take-Two Interactive Software for the first quarter of its fiscal year 2021 will be more or less impossible to predict in advance. Instead of trying to get those exact numbers, a better option would be for investors to focus on the information we have and marginally trust what analysts currently expect. Consider, for example, what the management team at Take-Two Interactive Software recently said regarding tips for its 2023 fiscal year. At present, excluding the impact that Zynga is expected to have, the company is forecasting revenue of between $3.67 billion and $3.77 billion. This represents a mid-term increase of 6.1% from the company’s announced $3.50 billion for its 2022 fiscal year. This will come following bookings for the company that will climb between $3.75 billion and $3.85 billion, compared to $3.4 billion the company reported for the end of its 2022 fiscal year.

Profitability, meanwhile, is likely to be all over the map. Earnings per share between $1.90 and $2.15 implies revenue between $223 million and $252 million. This is actually down from the $418 million reported in 2020. At the same time, however, cash flow from operations is expected to increase from $258 million in 2022 to $390 million. dollars in 2023. Looking at the first quarter alone, management also provided some thoughts. They currently forecast revenue of between $810 million and $860 million, with net income between $94 million and $105 million. To put that into perspective, in the first quarter of 2022, sales were $813.7 million, while net income was robust at $152.3 million. Analysts have provided some information on this front. They believe the overall revenue for the quarter will be $1.09 billion. However, again, analysts are factoring in Zynga’s impact, while Take-Two Interactive Software is not considering it at this time. From an earnings perspective, analysts seem to think the company’s own directions make more or less sense.

At first glance, these numbers may not seem so valuable because they exclude the impact that Zynga is expected to have. But to me, they’re valuable in that they demonstrate that Take-Two Interactive Software continues to grow on its own, even though its profitability metrics are going to be volatile year over year. For the combined company, I think a better approach is to look at the financial performance for the most recent fiscal year for both entities. By doing so, and combining these numbers, we can begin to see whether or not it still makes sense to buy Take-Two Interactive Software after its acquisition of Zynga.

TTWO 2021 Results - With Zynga and Consolidated Projections

Author – SEC EDGAR Data

In a previous article, I detailed the positive and negative points of this merger. And in this article, I ultimately rated Take-Two Interactive Software as a “buy” because I felt the company was trading at affordable levels compared to the implied buyout price of ActivisionBlizzard (ATVI) by Microsoft (MSFT). Although I said that because of the discount Zynga was trading for compared to its implied price, it would make more sense for investors to buy stock there than in Take-Two Interactive Software directly. Since then, shares of Take-Two Interactive Software are up 17.7% compared to the 3% increase we saw with the S&P 500.

Even after taking that increase into account, the deal looks pretty positive to me. Assuming that 2021 the financial year is representative of how each company will fare now that they are combined, the shares look quite affordable. All combined and excluding the prospects for synergies and further growth, adjusted operating cash flow for both businesses is expected to be $1.41 billion. This cash flow figure does not take into account changes in working capital from year to year. Meanwhile, the combined entity’s EBITDA is expected to be approximately $1.66 billion. Given the $12.7 billion enterprise value of the transaction, combined with the current enterprise value of Take-Two Interactive Software, the combined company is expected to trade at an EV/EBITDA multiple of 14.9. . This compares to the 16.9 multiple that Activision Blizzard agreed to be sold for. Meanwhile, the price of the adjusted operating cash flow multiple stands at 14.7. That compares to the 20.2 reading we get for Activision Blizzard. So at least Take-Two Interactive Software is trading cheaper now than its bigger rival.

TTWO Stock Consolidated vs Activision Blizzard implied buyout

Author – SEC EDGAR Data


Based on the data provided, it looks to me like things are looking pretty good for Take-Two Interactive Software shareholders. To be clear, I expect a lot of interesting developments when the company releases its financial performance. And I also expect the coming quarters to be particularly enlightening because there will be a lot of activity behind the scenes. But given the stock price, I still feel comfortable grading Take-Two Interactive Software as a “buy,” the idea being that continued growth should help push the title even higher than it is not today.